On track to deliver mid-teens ROCE in 2020

INTERIM RESULTS FOR THE SIX MONTHS

ENDED 30 JUNE 2019

30 JULY 2019

"We have had a good start to the year and are on track to deliver full-year earnings in line with market expectations. Focus on delivery in our key sectors, combined with operational and cost efficiencies and the benefit from our investments in systems, has delivered improved profitability. We continue to innovate to meet our customers' evolving needs through the energy transition, and during the period we launched the Y.Cube, our new modular and mobile energy storage system. Progress on receivables has also been encouraging, particularly in Africa, and this all underpins our confidence in achieving our mid-teens ROCE target in 2020."

1Underlying excludes pass-through fuel and currency. A reconciliation between reported and underlying performance is detailed on page 10.

·; Underlying1 Group revenue down 4%

o Rental Solutions underlying1 revenue up 1%

o Power Solutions Industrial underlying1 revenue down 9%, up 4% excluding the Winter Olympics

o Power Solutions Utility underlying1 revenue down 7%

·; Profit before tax of £60 million, up 9% on an underlying1 basis

·; Operating cash inflow of £210 million, an increase of £50 million, partly driven by a £31 million lower working capital outflow

·; ROCE of 10.2% (2018: 10.5%) shows an improvement of 0.6 percentage points on an underlying1 basis

·; Interim dividend maintained at 9.38p per share

·; Mobilised our first Y.Cubes as hybrid pipeline continues to build

·; On track to deliver full year earnings in line with market expectations and mid-teens ROCE in 2020

RESULTS FOR THE SIX MONTHS TO 30 JUNE 2019

GROUP TRADING PERFORMANCE

Underlying1 Group revenue decreased 4%. Excluding the benefit from the Winter Olympics in 2018, underlying1 Group revenue was in-line with the prior year, reflecting a small increase in Rental Solutions and solid growth in Power Solutions Industrial, offset by a decline in Power Solutions Utility. Underlying1 profit before tax was up 9% at £60 million. The operating margin was 10.5% (2018: 8.9%) with growth in all three business units. Diluted earnings per share (DEPS) were 15.33 pence (2018: 15.85 pence), up 4% on an underlying basis.

The Group's return on capital employed (ROCE) decreased to 10.2% (2018: 10.5%) due to the impact of currency. On an underlying1 basis ROCE rose 0.6 percentage points.

Reported financial measures

Reported revenue and operating profit include the translational impact of currency as Aggreko's revenue and profit are earned in a number of different currencies (most notably the US Dollar), which are then translated and reported in Sterling. The movement in exchange rates in the period increased revenue by £3 million and decreased operating profit by £4 million.

In addition, the Group separately reports fuel revenue from a few contracts in the Power Solutions Utility business where we manage fuel on a pass-through basis on behalf of our customers. The reason for the separate reporting is that fuel revenue on these contracts is entirely dependent on fuel prices and the volumes of fuel consumed, which can be volatile and may distort the view of the performance of the underlying business. Fuel revenue from these contracts was £20 million (2018: £89 million), with the year on year decrease due to lower fuel consumption.

Reported Group revenue was down 10% on prior year, with Rental Solutions up 4%, Power Solutions Industrial down 9% and Power Solutions Utility down 33%.

Outlook

Our full year earnings outlook is in line with market expectations and we remain on track to deliver mid-teens ROCE in 2020.

DIVISIONAL HEADLINES

Rental Solutions underlying1 revenue was up 1%, mainly driven by North America where revenue was up 7% with strong growth in oil & gas. The operating margin rose 1.1 percentage points to 11.8%, reflecting both higher rates and the benefit of our work in support of the power shortages in Belgium.

Power Solutions Industrial underlying1 revenue decreased 9%. Excluding the benefit of the South Korea Winter Olympics in the prior year revenue increased 4%, with good growth in Latin America, Africa and the Middle East, partially offset by a slowdown in Eurasia and Asia. The operating margin was 10.5%, up 0.6 percentage points.

Power Solutions Utility underlying1 revenue was down 7% primarily due to 2018 off hires in Mozambique and Japan. The operating margin (excluding pass-through fuel) was up 3.5 percentage points on an underlying basis, to 8.9%.

Cash flow and balance sheet

During the first six months, we generated an operating cash inflow of £210 million (2018: £160 million). The increase in operating cash flow is mainly driven by a year on year increase in EBITDA of £23 million and a reduction in working capital outflows of £31 million, partially offset by a higher cash outflow of £9 million relating to mobilisation (fulfilment assets) and demobilisation activities.

The working capital outflow in the period of £16 million (2018: £47 million) comprises a £34 million inflow from trade and other receivables, a £48 million outflow from trade and other payables and a £2 million outflow from inventory.

The decrease in trade and other receivables is analysed by division as a £42 million decrease in Power Solutions Utility and a £8 million increase in Power Solutions Industrial. Rental Solutions was flat year on year, comprising a decrease in accrued income offset by an increase in trade debtors as the business targeted a reduction in the level of unbilled revenue that had built up through the end of 2018. The decrease in Power Solutions Utility was driven by strong collections in the period, while the increase in Power Solutions Industrial reflects activity levels in the period.

The movement in the fulfilment asset and demobilisation provisions mainly relates to mobilisation costs on our 15-year PIE A contract in Brazil, our latest HFO contract in Burkina Faso and the Tokyo 2020 Olympics.

The decrease in trade and other payables balances since the year end is primarily driven by lower fuel consumption in our contracts in Brazil.

Fleet capital expenditure was £83 million (2018: £87 million). Within this, £29 million was invested in our Rental Solutions business, primarily in relation to temperature control and oil free air (OFA) products, and £54 million in Power Solutions, which included investment related to our contracts for the Tokyo 2020 Olympics and our ongoing fleet refurbishment programme.

Net debt at 30 June 2019 was £784 million. This was £43 million higher than the prior year with the increase driven by the recognition within net debt of a £102 million lease creditor following the Group's adoption of IFRS 16 'Leases' from 1 January 2019, absent which net debt would have reduced £59 million year on year. A detailed cash flow is included on page 16 of the financial statements.

This resulted in net debt to EBITDA on a rolling 12-month basis of 1.5 times compared to 1.4 times2 at 30 June 2018. The increase on prior year is driven by the impact of IFRS 16 'Leases' which increased net debt to EBITDA by 0.2 times.

Dividends

The Group is proposing to maintain the interim dividend at 9.38 pence per share (2018: 9.38 per share), which equates to dividend cover of 1.6 times (2018: 1.7 times). Dividend cover is calculated as basic earnings per share for the period divided by the dividend per share.

2Not restated for IFRS 16 ‘Leases’

ADDITIONAL PERFORMANCE METRICS

* Includes £102 million of a lease creditor on adoption of IFRS 16 'Leases' from 1 January 2019.

BUSINESS UNIT PERFORMANCE REVIEW

RENTAL SOLUTIONS

·; Underlying1 revenue and operating profit, up 1% and 12% respectively

·; Strong performance in key sectors, notably oil & gas and petrochemicals & refining

·; Improved operating margin of 11.8%, up 1.1 percentage points on an underlying1 basis

·; ROCE of 14.3% reflects an underlying1 decrease of 1.2 percentage points, primarily driven by the impact of the transition to IFRS 16

North American underlying1 revenue was up 7% on the prior year (up 16% excluding hurricane revenue in 2018). Our sector focus has continued to drive growth and we saw good performance in most of our key sectors, particularly in oil & gas, petrochemical & refining and events. This top-line growth enabled us to leverage our fixed cost base more effectively, leading to an improved operating margin.

In our Australia Pacific business, underlying1 revenue decreased 14% as good growth in the mining sector was offset by a 100MW emergency contract in the prior year numbers. Despite this revenue reduction, our focus on cost efficiencies helped to drive an improvement in operating margin.

Our Continental European business grew underlying1 revenue 12%, aided by revenue earned from work in response to power shortages in Belgium and the FIFA Women's World Cup in France.

Underlying1 revenue in Northern European was down 9%, as Next Generation Gas contracts in Ireland began to off-hire as planned, together with a slowdown in wider market activity related to Brexit. Notwithstanding the revenue reduction, ongoing cost discipline helped drive a first half improvement in operating margin.

Operating margin on an underlying1 basis was up 1.1 percentage points, reflecting higher rates in key sectors within NAM and our emergency work to support the power shortages in Belgium; this was despite lower fleet utilisation as the prior year hurricane work off-hired. We are also beginning to see benefits arising from the systems implementation, enabling us to focus on more profitable work and improve cost recoveries.

POWER SOLUTIONS

·; Power Solutions Industrial

− Underlying1 revenue decreased 9%; up 4% excluding the 2018 Winter Olympics

− Underlying1 profit decreased 4%

− Operating margin at 10.5% was up 0.6 percentage points on an underlying1 basis

− ROCE of 10.6% is up 1.6 percentage points on an underlying1 basis

·; Power Solutions Utility

− Underlying1 revenue was down 7% due primarily to 2018 off hires in Mozambique and Japan

− Underlying1 operating profit was up 52% as a result of improved operational performance

− ROCE up 0.9 percentage points to 6.0% on an underlying1 basis

Power Solutions Industrial

Power Solutions Industrial underlying1 revenue decreased 9%. Revenue excluding the 2018 Winter Olympics was up 4% on the prior year. Revenue in Latin America increased 16%, primarily driven by industrial projects, most notably in the oil and gas sector in Ecuador. In the Middle East revenue increased 6% with good growth in Oman, partially offset by reduced revenue in Kuwait. Revenue in Africa increased 29%, driven by Nigeria and industrial projects in the Democratic Republic of Congo (DRC). In Eurasia revenue decreased 10%, with the slower order intake seen in the second half of 2018, and pressure on rates from increased competition, continuing. Revenue in Asia decreased 21% mainly driven by South Korea (excluding 2018 Winter Olympics) due to a reduction in work related to mining, and oil and gas.

Operating margin on an underlying1 basis was up 0.6 percentage points on the prior year at 10.5%, supported by a good performance in both Africa and Latin America in leveraging their respective cost bases.

Power Solutions Industrial order intake was 213 MW (2018: 264 MW) including 127 MW in Eurasia (2018: 131 MW) with the prior year intake reflecting a large industrial project in the DRC.

Power Solutions Utility 

Power Solutions Utility saw underlying1 revenue decrease 7% due primarily to 2018 off hires in Mozambique and Japan. The operating margin (excluding pass-through fuel) was up 0.6 percentage points to 8.9%, and on an underlying1 basis the operating margin was up 3.5 percentage points due to the early benefit of our cost reduction programme.

Average megawatts on hire in this business was 2,473 (2018: 2,680), with the year on year reduction reflecting higher off-hires than on-hires over the last 12 months, as projects off-hired in Myanmar, Indonesia and Argentina. The off-hire rate in the first half was 15% (2018: 27%) and we expect the full year off-hire rate to be around 35% (2018: 42%). Order intake year to date for Utility sector projects is 245 MW (2018: 102 MW), including 60MW in Gabon and 60MW in Senegal.

Managing the trade receivables in our Power Solutions Utility business continues to be a major focus, with active ongoing engagement with our customers a key priority. Encouragingly our Power Solutions Utility cash collections in the first six months were $295 million compared with amounts invoiced of $244 million. 

However, as noted on page 103 in the Group's 2018 Annual Report and Accounts with respect to the prior year, we continue to experience delays in receiving payments in parts of Africa, Venezuela and Yemen due to our customers' liquidity positions and their limited access to foreign currency. While the overall Power Solutions Utility bad debt provision of $84 million at 30 June 2019 was broadly in line with 31 December 2018 ($83 million), reflecting the differing circumstances by customer, within this amount we have increased by $3 million the bad debt provision against specific contracts in Yemen.

Operational summary

FINANCIAL REVIEW

A summarised Income Statement for the first six months of 2019 is set out below.

Currency translation

The movement in exchange rates in the period had a minimal impact on revenue and decreased operating profit by £4 million. Currency translation also gave rise to a £1 million decrease in the value of the Group's net assets from December 2018 to June 2019. Set out in the table below are the principal exchange rates which affected the Group's profit and net assets.

Reconciliation of reported to underlying results

The tables below reconcile the reported and underlying revenue and operating profit movements:

Revenue

Operating profit

Notes:

1. The currency impact is calculated by taking the 2018 results in local currency and retranslating them at 2019 average rates.

2. The currency impact line included in the tables above excludes the currency impact on pass-through fuel in PSU, which in 2019 was £4 million on revenue and £nil on operating profit.

Interest

The net interest charge of £21 million was £4 million higher than last year, primarily due to an increase in interest of £3 million associated with the adoption of IFRS 16 'Leases'. Interest cover, measured against rolling 12-month EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation) remained strong at 13 times (2018: 15 times).

Effective tax rate

The current forecast of the effective tax rate for the full year, which has been used in the interim accounts, is 35% (30 June 2018: 31%). The increase in the effective rate is driven primarily by a change in the expected geographic profit mix for the year.

Dividends

The Board has decided to pay an interim dividend of 9.38 pence per ordinary share, in line with last year; dividend cover is 1.6 times (30 June 2018: 1.7 times). This interim dividend will be paid on 1 October 2019 to shareholders on the register at 6 September 2019, with an ex-dividend date of 5 September 2019. Dividend cover is calculated as basic earnings per share for the period divided by the dividend per share.

Cash flow

During the first six months we generated an operating cash inflow of £210 million (2018: £160 million). The increase in operating cash flow is mainly driven by a year on year increase in EBITDA of £23 million and a £31 million reduction in working capital outflows, partially offset by higher cash outflows relating to mobilisation (fulfilment assets) and demobilisation activities of £9 million. Capital expenditure in the period was £99 million (2018: £95 million), of which £83 million (2018: £87 million) was spent on fleet assets. The working capital movements in the period are explained on page 3. 

Financial resources

The Group maintains sufficient facilities to meet its normal funding requirements over the medium term. At 30 June 2019 these facilities totalled £1,077 million, in the form of committed bank facilities arranged on a bilateral basis with a number of international banks and private placement notes. The financial covenants attached to these facilities are that EBITDA should be no less than 4 times interest and net debt should be no more than 3 times EBITDA. The covenants exclude the impact of IFRS 16 'Leases' and, on that basis, at 30 June 2019 these ratios were 14 times and 1.3 times. The maturity profile of the Group's borrowings is detailed in Note 11 in the Accounts.

Net debt (including £102 million of a lease creditor on adoption of IFRS 16 from 1 January 2019) amounted to £784 million at 30 June 2019 and, at that date, undrawn committed facilities were £432 million.

Net operating assets

The net operating assets of the Group (including goodwill) at 30 June 2019 totalled £2,190 million, £67 million higher than 30 June 2018. The main components of net operating assets are detailed in the table below.

A key measure of Aggreko's performance is the return (expressed as underlying operating profit) generated from average net operating assets (ROCE). For each half year reporting period, we calculate ROCE by taking the underlying operating profit on a rolling 12-month basis and expressing it as a percentage of the average net operating assets at 30 June, 31 December and the previous 30 June. In the first half of 2019 the ROCE decreased to 10.2% compared with 10.5% for the same period in 2018, primarily due to the impact of currency. On an underlying1 basis ROCE rose 0.6 percentage points.

Shareholders' equity

Shareholders' equity decreased by £6 million to £1,361 million in the six months ended 30 June 2019, represented by the net assets of the Group of £2,145 million before net debt of £784 million. The movements in shareholders' equity are analysed in the table below:

3 Reflects the final dividend for 2018 of 17.74 pence per share (2017 17.74 pence) that was paid during the period.

IFRS 16 'Leases'

The Group adopted IFRS 16 from 1 January 2019 using the modified retrospective approach and therefore the comparative information has not been restated.

IFRS 16 addresses the accounting for leases and requires lessees to recognise all leases on balance sheet with limited exemptions. This results in the recognition of a right-of-use asset and corresponding liability on the balance sheet, with the associated depreciation and interest expense being recorded in the income statement over the lease period. Limited exemptions apply for short-term leases (leases with a term of 12 months or less) and low value leases (

The impact from applying IFRS 16 for the six months ended 30 June 2019 was:

Income statement

·; Improvement in operating profit of £2 million

·; Increase in depreciation of £14 million

·; Increase in interest costs of £3 million

·; Reduction in profit before tax of £1 million

Balance sheet/Cash flow statement

·; Right of use asset included within property, plant & equipment of £101 million as at 30 June 2019 (1 January 2019: £104 million)

·; Lease liabilities of £102 million as at 30 June 2019 (1 January 2019: £104 million)

·; Net debt at 30 June 2019 is higher by £102 million

Ratios

·; An increase in EBITDA of £16 million

·; An increase in net debt/EBITDA of 0.2 times

·; Reduction in Group ROCE of 0.3pp

Principal risks and uncertainties

In the day to day operations of the Group we face various risks and uncertainties. We seek both to prevent these risks from materialising and to mitigate their impact if they do arise. The Board has developed a risk management framework to facilitate this.  The principal risks that we believe could potentially affect the Group are summarised below:

·; Global macroeconomic uncertainty;

·; Market dynamics;

·; Disruptive technology;

·; Talent management;

·; New technology market introduction;

·; Change management;

·; Service delivery: major contractual failure;

·; Cyber security;

·; Escalating sanctions;

·; Health and safety;

·; Security;

·; Failure to conduct business dealings with integrity and honesty; and

·; Failure to collect payments or to recover assets.

Other than the one change noted below, we do not believe that the principal risks and uncertainties facing the business have changed materially since the publication of the 2018 Annual Report and Accounts.

One risk has returned to the Group risk register following our six-monthly update process: "Service delivery: major contractual failure". The level of this risk is likely to fluctuate with the number of major contracts that we are delivering at any point in time.

Shareholder information

Our website can be accessed at www.plc.aggreko.com. This contains a large amount of information about our business. The website also carries copies of recent investor presentations, as well as London Stock Exchange announcements.

GROUP INCOME STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2019 (UNAUDITED)

GROUP STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30 JUNE 2019 (UNAUDITED)

GROUP BALANCE SHEETAS AT 30 JUNE 2019 (UNAUDITED)

GROUP CASH FLOW STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2019 (UNAUDITED)

Cash flows for the purchase and sale of rental fleet assets are presented as arising from investing activities because the acquisition of new fleet assets represents a key investment decision for the Group, the assets are expected to be owned and operated by the Group to the end of their economic lives, the disposal process (when the assets are largely depreciated) is not a major part of the Group's business model and the assets in the rental fleet are not specifically held for subsequent resale.

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

AS AT 30 JUNE 2019

Other non-cash movements include reclassifications between short term and long term borrowings, with £48 million being reclassified from non-current to current borrowings and £11 million from non-current to current lease liabilities. The remaining balance is due to £12 million of new lease liabilities in the period.

AS AT 30 JUNE 2018

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE 2019 (UNAUDITED)

(i) The currency translation difference is explained in the Financial Review on page 9.

(ii) During the period 654,496 Ordinary shares have been transferred from the Employee Benefit Trust to satisfy the Restricted Stock Schemes and Share Save Schemes.

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE 2018 (UNAUDITED)

(i) During the period 41,543 Ordinary shares have been transferred from the Employee Benefit Trust to satisfy the Restricted Stock Schemes.

(ii) During the period 940,000 Ordinary shares were purchased at an average price of £7.39 and transferred to the Employee Benefit Trust.

NOTES TO THE INTERIM ACCOUNTS

FOR THE SIX MONTHS ENDED 30 JUNE 2019 (UNAUDITED)

1. GENERAL INFORMATION

The Company is a public limited company which is listed on the London Stock Exchange and is incorporated and domiciled in the UK. The address of the registered office is 120 Bothwell Street, Glasgow, G2 7JS, UK.

This condensed interim report was approved for issue on 30 July 2019.

This condensed consolidated interim report does not comprise Statutory Accounts within the meaning of Section 434 of the Companies Act 2006. Statutory Accounts for the year ended 31 December 2018 were approved by the Board on 6 March 2019 and delivered to the Registrar of Companies. The report of the auditor on those Accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act 2006.

The condensed consolidated interim report is unaudited but has been reviewed by the Group's auditor, whose report is on page 33.

2. BASIS OF PREPARATION

This condensed consolidated interim report for the six months ended 30 June 2019 has been prepared in accordance with the Disclosure and Transparency Rules (DTR) of the Financial Conduct Authority (previously the Financial Services Authority) and IAS 34 'Interim financial reporting' as adopted by the European Union. The condensed consolidated interim report should be read in conjunction with the annual financial statements for the year ended 31 December 2018, which have been prepared in accordance with IFRSs as adopted by the European Union.

Going concern basis

Given the proven ability of the business to fund organic growth from operating cash flows, and the nature of our business model, we believe it is sensible to run the business with a modest amount of debt. We say 'modest' because we are strongly of the view that it is unwise to run a business which has high levels of operational gearing with high levels of debt. Given the above considerations, we believe that a Net Debt to EBITDA ratio of around one times is appropriate for the Group over the longer term.

The Group maintains sufficient facilities to meet its normal funding requirements over the medium term. At 30 June 2019, these facilities totalled £1,077 million in the form of committed bank facilities arranged on a bilateral basis with a number of international banks and private placement notes. The financial covenants attached to these facilities are that EBITDA should be no less than 4 times interest and net debt should be no more than 3 times EBITDA. The covenants exclude the impact of IFRS 16 'Leases' and, on that basis, at 30 June 2019 these ratios were 14 times and 1.3 times. The Group does not expect to breach these covenants in the year from the date of approval of this interim report and the Group expects to continue to be able to arrange sufficient finance to meet its future funding requirements. It has been the Group's custom and practice to refinance its facilities in advance of their maturity dates, providing that there is an ongoing need for those facilities. Net debt amounted to £784 million at 30 June 2019 and, at that date, undrawn committed facilities were £432 million.

The Group balance sheet shows consolidated net assets of £1,361 million (30 June 2018: £1,298 million) of which £1,003 million (30 June 2018: £1,078 million) relates to fleet assets. The defined benefit pension surplus is £1 million (30 June 2018: deficit of £2 million).

Based on the above the Directors are confident that it is appropriate for the going concern basis to be adopted in preparing the half year financial statements.

3. ACCOUNTING POLICIES

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

Except as described below, the accounting policies are consistent with those of the annual financial statements for the year ended 31 December 2018, as described in those annual financial statements.

The Group adopted IFRS 16 'Leases' from 1 January 2019 and, therefore, this is the first set of the Group's financial statements where IFRS 16 has been applied. Changes to significant accounting policies are described below. The changes in accounting policies will be reflected in the Group's consolidated financial statements as at and for the year ending 31 December 2019.

IFRS 16

IFRS 16 addresses the accounting for leases and requires lessees to recognise all leases on balance sheet with limited exemptions. This results in the recognition of a right-of-use asset and corresponding liability on the balance sheet, with the associated depreciation and interest expense being recorded in the income statement over the lease period. Limited exemptions apply for short-term leases (leases with a term of 12 months or less) and low value leases (

The Group has adopted IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application (£nil) is recognised in retained earnings at 1 January 2019. Accordingly, the comparative information has not been restated and continues to be reported under IAS 17 'Leases' and IFRIC 4 'Determining Whether an Arrangement contains a Lease'.

Definition of a lease

Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4. Under IFRS 16, a contract is, or contains a lease, if the contract conveys a right to control the use of an identified asset for a period in exchange for consideration.

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

- to grandfather the assessment of which transactions are leases. The Group applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed. Therefore, the definition of a lease under IFRS 16 has been applied only to contracts entered or changed on or after 1 January 2019;

- the use of hindsight in determining the lease term if the contract contains options to extend or terminate the lease;

- the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases; and

- to exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application.

Accounting policy

On initial measurement the right-of-use asset is recognised at cost, which comprises the value of the lease liability adjusted for any lease payments made on or before the commencement date, less any incentives received, any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset. The right-of-use asset is depreciated over the shorter of the lease term and the useful life. The estimated useful life of the right-of-use asset is determined on the same basis as property, plant and equipment. The right-of-use asset is periodically adjusted for impairment, if any, and any remeasurements of the lease liability.

The Group leases various property, plant, equipment and vehicles. Rental contracts are typically for fixed periods from 3 to 7 years but may have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions.

On initial measurement the lease liability is measured at the present value of the future lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.

The lease liability is measured at amortised cost using the effective interest rate method and is remeasured when there is a change in the future lease payments arising from a change in index or a change in the original assessment made.

3. ACCOUNTING POLICIES CONTINUED

Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the income statement over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

The Group presents the right-of-use asset and lease liability on the balance sheet.

The Group has applied judgement to determine the lease term for some lease contracts that include renewal options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which affects the amount of lease liabilities and right-of-use assets recognised. Lease payments associated with short-term and low-value leases are recognised on a straight-line basis as an expense in the profit or loss.

On transition to IFRS 16 the Group recognised an additional £104 million of right-of-use assets and £104 million of lease liabilities at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 January 2019. The Group's weighted average incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 5%. On transition the right of use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments, which were not material.

The recognised right-of-use assets relate to the following types of assets:

The recognised lease liability at 1 January 2019 is detailed below.

Impact for the period

The impact from applying IFRS 16 for the six months ended 30 June 2019 was:

Income statement

·; Improvement in operating profit of £2 million

·; Increase in depreciation of £14 million

·; Increase in interest costs of £3 million

·; Reduction in profit before tax of £1 million

Balance sheet/cash flow statement

·; Right of use asset included within property, plant & equipment of £101 million at 30 June 2019 (1 January 2019: £104 million)

·; Lease liabilities of £102 million at 30 June 2019 (1 January 2019: £104 million)

·; Net debt at 30 June 2019 is higher by £102 million

Ratios

·; An increase in EBITDA of £16 million

·; An increase in net debt/EBITDA of 0.2 times

·; Reduction in Group ROCE of 0.3pp

IFRIC 23 'Uncertainty over Income Tax Treatments'

The Group adopted IFRIC 23 from 1 January 2019. There was no material impact arising from the adoption of this standard. 

4. SEGMENTAL REPORTING

(a) Revenue by segment